Legacy Wealth Weekly - May 6, 2016 (Slowing Down)

Penni Johnston-gill - May 06, 2016

Both the S&P/TSX and the S&P 500 posted declines this week (~1.5% and ~0.5%, respectively). A change in sentiment seems underway as US economic growth expectations are shifting down. A lowered earnings bar has allowed for 73% of S&P 500 companies to

Both the S&P/TSX and the S&P 500 posted declines this week (~1.5% and ~0.5%, respectively). A change in sentiment seems underway as US economic growth expectations are shifting down. A lowered earnings bar has allowed for 73% of S&P 500 companies to beat EPS estimates so far this quarter, but that masks a 5.1% fall in earnings for Q1/16. Meanwhile, a string of weak economic data has sent odds of a June rate hike to new lows. While usually a good support for equities, it was not the case this week A possible culprit is the US$ staging a strong rebound from the key technical support around 93. As mentioned last week, the US$ has played a crucial role in lifting risk assets over the past few weeks. Thus, recent positive momentum on the DXY can be interpreted as a profit-taking catalyst on risk assets. Case in point, despite a raging wildfire in Fort McMurray, crude oil and the CDN$ are down ~3% for the week while gold is holding its ground.

Speaking of the Canadian dollar, as we mentioned in the May edition of the Quantitative Strategist, we believe the Loonie can hardly trade above PPP (~0.81) given an important current account shortfall, government budget deficits and unappealing bond yields vs. US Treasuries. In fact, the biggest Canadian trade balance deficit on record (C$3.4B in March) suggests an imminent decoupling between oil prices and the Loonie. As shown in our Chart of the Week, when we exclude the impact of prices (fourth panel), the appreciation of the CDN$ YTD appears to be stiffing non-energy exports. Suffice it to say that CDN$ strength means bad news for Canadian manufacturers given that the US inventory-to-sales ratio stands at levels last seen in 2009. Thus, we believe the upside on the CDN$ is capped at PPP (~81 cents). However, we see good support at ~75 cents, around the 200-day moving average.

Regarding economic statistics this week, the Canadian economy shed 2.1k jobs in April. Job losses in Alberta (-20.8k), Manitoba (-3.0k) and Saskatchewan (-1.6k) seem consistent with job cuts in agriculture (-7.0k) and natural resources (-7.8k). In addition to a sobering employment report, the trade balance deficit cratered to a record 3.4B despite higher crude oil prices in March. In the US, nonfarm payrolls (+160k) also missed consensus estimates (202k), while the March numbers were revised down markedly to 208k (from 215k). The only silver lining (though not for profit margins) was the 0.3% MoM increase in wages. Also, while the manufacturing ISM dipped in April (50.8 from 51.8), the non-manufacturing index improved to 55.7 (from 54.5), suggesting the back end of the economy remains relatively healthy. In Europe, the final manufacturing PMI settled at 51.7 (from 51.6), while that of services came in flat at 53.1. Elsewhere, in Japan, the Nikkei manufacturing PMI remains below the 50 boom/bust line with a 48.2 print (from 49.1). In China, both the Caixin manufacturing and the service PMIs posted sequential declines, down to 49.4 and 51.8, respectively. In all, weak growth from trade partners and low inflation in Australia led the RBA to surprise the markets with a 25bps rate cut (to 1.75%). In India, both the manufacturing and service PMIs fell sequentially to 50.5 (from 52.4) and 53.7 (from 54.3), respectively, opening the door for the RBI to further stimulate the economy through rate cuts. Last, in Brazil, nothing less than an electroshock seems needed with the PMI tumbling to 42.6, industrial production growth falling to -11.4% YoY and inflation softening a notch (to 9.3%).

For next week, we await retail sales and the NFIB in the US. In China, the trade balance, inflation and loan growth are on deck. Last, inflation and industrial production in India should help gauge the RBI.

The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.